Eurocell PLC

LSE:ECEL

Earnings Call Analysis

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to the Eurocell plc's Half Year Results Conference Call. My name is Laura and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions]I will now hand you over to your host, Darren Waters, to begin today's conference. Thank you.

[Darren Waters, executive]

Thanks, Laura. Welcome to Eurocell half 1 results presentation. I'm Darren Waters, CEO, and this is my first results presentation having joined the business in April. Sitting alongside me is Michael Scott, CFO, who I'm sure needs no introduction. Now a number of our peers have already reported on the first half numbers so I'm not going to repeat stuff that you've already heard. But suffice to say that the first half has been a lot tougher than we expected with profit before tax at GBP 6 million, down 60% versus the same period last year. Q1 was particularly tough for the business due to the combination of lower seasonal volumes and a softening market especially in new build. In response, we've acted quickly to reduce our cost base and improve working capital, which has resulted in a better cash performance versus the same period in 2022. So as a result, I'm confident that we're now strongly positioned to benefit from a recovery in our end markets when that happens. I'll talk more about that at the end of the presentation.So let's start by talking about the market, which has been challenging for us given our exposure to new build and RMI market. As you all know, new build housing has been hit hard by progressive increases in mortgage rates and whilst the CPA are now forecasting a decline of 19% this year, the reality of what we are seeing is a lot worse than that. In fact we estimate that there's been a 30% contraction in the first half. New build accounts for 35% of our Profiles sales or 15% of our total revenues so a 30% drop in activity equates to a 5% reduction in group volumes. In terms of RMI: FENSA, which is the Fenestration Self-Assessment Scheme, they maintain a register of the number of door and window installations and their data shows a decline of 8% in the first half with quarter 2 down 12% versus 2022. Now while FENSA doesn't cover all installations, it's a really good barometer.So against that backdrop, I think we've delivered a resilient sales performance with volumes down 6% and revenues down just 2% with the upside coming from pricing actions and share gains. In June, the UK Windows & Doors Group announced plans to shut their Duraflex extrusion facility at Tewkesbury to concentrate on window fabrication and they will cease production in a little under 3 weeks. We estimate that Duraflex account for around 6% of the PVC profile market. UK Windows & Doors Group are the largest fabricator in the U.K. and although we held discussions with them, we were not willing to take the business at any price and they subsequently elected to contract with Veka instead. In June we announced that we had secured Polyframe, which is Duraflex's largest external fabricator, and they successfully transitioned across to us in July.Now in terms of our response to this, let me start by reminding you that in late 2022 we divested the loss-making Security Hardware business and reduced our cost base by GBP 5 million, including the removal of 65 roles. Despite these actions, very early on in my tenure it became clear that the business was geared up for high volumes. So we took decisive action to reduce further our cost base by eliminating around 100 roles, of which about 1/3 has been achieved through natural attrition. We managed to complete this restructuring exercise by the end of June and that will deliver GBP 2 million of savings in second half and GBP 4 million savings annualized thereafter. We've also taken a more disciplined approach to trade working capital by reducing inventory levels significantly beyond the drop in sales volumes without impacting service levels as measured by our OTIF performance, which remains at 97%.We've been able to do this because our operational performance is now much more predictable and consistent, which we've highlighted in the graphs opposite. Inventory, as a percentage of the last 12 months cost of sales, has fallen from a peak of 37% to 26% representing an GBP 11 million improvement in stock levels. Also worthy of note is a reduction in capital spend to GBP 9 million this year compared to an average of GBP 14 million over the prior 3 years. And lastly, in manufacturing, our adherence to production plans has improved from an average of 90% to 95% with less variability from month to month. Aside from a material reduction in demand, we've also had to manage rising input costs particularly on recycling feedstock and energy. Those costs have been passed on to customers through a combination of surcharges and price increases, but are lagging the implementation of these during Q1 meant that our margins were squeezed.In-feed costs have risen much faster than we anticipated as recyclers have competed for reduced availability of post-consumer waste due to the contraction in the replacement window market. You can see the impact of this in the graph opposite with in-feed prices more than counteracting the reduction in virgin resin costs. We've now recovered those cost increases through pricing actions, but some of that benefit have been offset by margin leakage in our branch network due to the increased competitive activity. To combat the impact of rising in-feed prices, we started to target waste generators direct bypassing waste aggregators with 80 contracts already signed representing 20% of our annual requirements. It's also important to say that despite the increase in in-feed prices, recycling still delivers a cost saving compared to virgin resin, which Michael will pick up later.The actions that we've taken to reduce our cost base will not inhibit our ability to increase output and this coupled with a 10% year-on-year improvement on OEE means that we stand to benefit from a positive operational gearing effect when markets recover. Eurocell has long been seen as an innovator in the door and window market and following the successful introduction of our Garden Room range, we just announced the launch of our new extension system, which will revolutionize the way that people extend their homes. Our EurXtension system combines our market leading high-performing products along with our passion to design, innovation and modern methods of construction. The result, as you can see here, is a stylish and affordable alternative to traditional extensions that can be erected in a fraction of the time.We see significant potential for this product as it can be fitted on to an existing concrete base replacing tired old conservatories that are not habitable in extreme temperatures by being too cold during the winter and too hot in the summer. Early lead generation results from our initial social media campaign have been very encouraging. In fact we sold our first EurXtension yesterday and whilst it is very early days, we expect this new product category to make a positive contribution in 2024 as homeowners look to extend to create more living space rather than move.Now I'm going to hand over to Michael, who will cover off the financial performance.

[Michael Scott, executive]

Thanks, Darren. So I'll start by going through the financial highlights on Page 7. Against a very challenging market backdrop, we delivered some resilience in our sales performance. Revenues were down 2% overall with volumes 6% lower against an extremely strong comparison period. Price remains a significant component of sales and we continue to recover persistent input cost inflation with selling price increases and challenges. As expected, adjusted profit before tax decreased by 62% compared to H1 2022. This reflects lower sales volumes and competitive pressure on margins in the branch network as well as the impact of significantly higher recycling feedstock prices, which were up 66% compared with the first half of last year. More positively, overheads were 3% lower than H1 2022, which includes the benefit of actions taken to lower our cost base in response to declining volumes.In the light of difficult and deteriorating market conditions, we have prioritized cash flow and I'm pleased to report net cash from operating activities of GBP 20.9 million, up 15% on H1 2022 with efficient stock management driving a good working capital improvement so far this year. As a result, net debt at 30 June was GBP 15.2 million on a pre-IFRS 16 basis compared to GBP 14.4 million at the end of 2022 and GBP 15.0 million at June last year. We have good headroom on our debt facility, which was extended by a further year in May and now matures in 2027. Moving back to the P&L. Adjusted earnings per share were 4.3p, down 63% in line with adjusted PBT and the interim dividend is 2.0p per share.Turning to the full P&L on Page 8. I'll come on to the drivers of our sales performance and the other components of EBITDA in a moment, but first just looking below that line. Depreciation and amortization was GBP 12.1 million, up slightly on H1 2022 and with our CapEx program and lease renewals, we expect D&A for the full year to be in the region of GBP 25 million. And just to note that I've summarized all the guidance that I'll give today at the end. Finance costs were GBP 1.6 million, up GBP 0.2 million on H1 '22 reflecting the impact of successive interest rate increases and I expect finance costs for the full year to be around GBP 3 million. The tax rate for H1 was approximately 19%, which is lower than the standard rate due to the benefit of Patent Box relief, but higher than 2022 due to the increase in the rate of corporation tax in April.Moving down the P&L. Basic earnings per share were 4.3p and dividends I've already covered. The right of this slide have set out the impact of actions we've taken on cost in response to weakening markets and lower volumes, which drive GBP 9 million of annualized savings, the detail of which Darren covered earlier. The nonunderlying charge of GBP 2.5 million in H1 '23 includes termination costs of GBP 1.8 million for the headcount reduction in Q2 this year. It also includes implementation costs of GBP 0.7 million for strategic IT projects. These costs have been charged to the P&L rather than capitalized in accordance with the accounting rules for solutions which are cloud-based known as Software as a Service. They've been treated as nonunderlying on the basis that they are material multiyear projects, which underpin our digital strategy, and I'll pick up the specific projects later in the conversation.Moving on to the components of sales growth on Page 9. Total sales were down 2% against an extremely strong comparative period in H1 last year with overall volumes down 6%. We think this demonstrates resilience in the face of very tough markets. As you know, RMI is being impacted by weak consumer confidence reflected in homeowners pulling back on discretionary spend in response to high living costs, reduced housing transactions and a fall in planning applications for larger residential improvements. We're also seeing a severe decline in new build housing activity reflecting success of interest rate increases with the prospect of more to come. Profiles sales down 1% with volumes 5% lower reflect this reduced RMI and weaker new build activity, partially offset with the benefit of market share gains with 29 new accounts won in 2022 and 18 smaller new accounts added in the first half of '23.As a reminder, new accounts tend to come on stream over a 6- to 9-month onboarding period. Building Plastics sales were down 3%, including volume 6% lower with RMI activity in the branches subdued but steady although it is encouraging to report that we are still seeing reasonable volumes of high value project work. On to adjusted operating profit on Page 10. Profit of GBP 7.6 million represents a decrease of 56%, down as expected against a very strong 2022 comparison. Looking at the detail and moving left to right across the chart. The volume bar of GBP 4.3 million includes the impact of sales volumes down 6% and the adverse effect of operational gearing. Moving to margin of GBP 4.2 million, we continue to offset input cost inflation with selling prices and surcharges, but increased competition and limited demand led to an increasingly difficult pricing environment and margin pressure in the branches.Skimming along the chart. As you know, we also mitigate raw material cost increases by using recycled material. However, first half profits were significantly impacted by feedstock price 66% higher than last year leading to increased costs of GBP 3.5 million. This was driven by reduced material availability following a contraction in the window replacement market. We've been working hard to secure additional sources of supply, which alongside reduced demand in lower virgin resin costs may see feedstock prices fall in H2 and we have seen signs that they're now beginning to ease. Looking beyond the chart, whilst the delta between production cost of recycled material and the buying price of virgin compound narrowed significantly this year due to increased feedstock prices and lower virgin cost, it is important to confirm that the economics of recycling remain attractive.The 9,100 tonnes of recycled material we consumed in H1 delivered an absolute gross margin benefit of approximately GBP 1.4 million compared to the cost of using virgin resin. Moving along the chart. Labor inflation of GBP 1.6 million represents our April '23 pay award of 5%, which is offset by lower variable labor costs being reduced bonuses and share-based payment charges in the first half of this year. Finally, restructuring savings of GBP 2.5 million represent the benefits of the cost reduction program completed in Q4 of 2022. In summary, profits are down as a result of lower volumes, margin pressure in the branches and increased recycling feedstock prices. However, the actions we've taken to reduce cost position the business well to benefit from positive operation viewing when markets recover.Moving on to CapEx on Page 11. Investments of GBP 3.8 million in H1 was mostly maintenance CapEx. We spent GBP 1.6 million in extrusion including new tooling and GBP 0.7 million in Building Plastics to improve staff welfare facilities in the branches. Our guidance for '23 is for total CapEx of approximately GBP 9 million. This is again primarily maintenance CapEx and also includes GBP 1 million to develop our IT infrastructure, including hardware replacement and a new customer-facing website. In accordance with the accounting rule, implementation costs for IT solutions which are cloud-based Software as a Service are charged to the P&L rather than capitalized. Our new HR information system and ERP replacement fall into this category for which GBP 0.7 million has been charged to the P&L in H1 as a nonunderlying item on the basis that they are material multiyear projects, which underpin our digital strategy.As a reminder, our existing ERP system will be unsupported by SAP after 2027. We also believe that the age profile has become a limiting factor in the development of our business. The current system was implemented in 2006 when the group had only a small branch operation and no recycling. We have therefore started a project to upgrade or replace SAP with the principal tasks for this being scoping and system selection for this year. Thereafter, we anticipate implementation to be a 2- to 3-year process. And whilst it is very early days for the ERP work, we estimate total implementation costs for the 2 projects will be in the region of GBP 7 million to GBP 9 million over that period, most of which relates to ERP. Coming back to CapEx and to sum up, the charts and tables illustrate the significant investments we've made over the last few years to build out the infrastructure required to resolve operational constraints.As a result, we now have manufacturing, recycling and warehousing capacity in place well ahead of demand, which is another important component of being ready and well-placed to benefit from a market return. Moving on to working capital on Page 12 where the net inflow of GBP 4.2 million includes the impact of our stock reduction program. Stock days were 86 compared to 93 at December and 101 at June 2022 with stocks themselves down GBP 6.4 million in the first half. It is worth reminding you that following significant supply chain disruption in 2021, we took advantage of raw material availability to build manufactured stocks at the end of that year and early in '22 to protect against the possible impact of raw material shortages. However, once we established supply chain and operational stability, we began to reduce our stock position.As a result, stock levels fell by GBP 5 million in the second half of '22 and by a further GBP 6 million in H1 of '23, which includes the benefit of lower input costs and there remains a further opportunity for the remainder of this year. On the sales ledger, debtor days were 34 compared to 30 at December and 36 at June '22 with the absolute balance of receivables up GBP 4.5 million in the first half reflecting the impact of the selling price increases and seasonality offset by good cash collection. Finally, the payables increase of GBP 2.3 million since December '22 also reflects the impact of seasonality and inflation. Looking ahead to the full year, we're now guiding to an inflow of at least GBP 5 million, which represents a substantial improvement on the guidance issued at the beginning of the year reflecting in the light of deteriorating market conditions our major focus on working capital and efficient cash flow management.Turning to the cash flow on Page 13 where we have all the components of a small increase in net debt of GBP 0.8 million in the first half on a pre-IFRS 16 basis. Into the factors driving the working capital improvements so now I'm moving left to right across the chart. Nonunderlying costs resulted in an outflow of GBP 2.5 million. Tax paid and other of GBP 0.5 million includes tax payments on account of GBP 1.4 million offset by share-based payments and other noncash items of GBP 0.9 million. CapEx payments of GBP 4.1 million include the asset additions covered earlier plus a small reduction in our CapEx credit of GBP 0.3 million. And then there are financing charges and the cost of treasury shares purchased to satisfy employee share schemes of together GBP 1.6 million. Dividends paid were GBP 8.1 million. This all adds up to a pre-IFRS 16 net debt increase of GBP 0.8 million resulting in net debt of GBP 15.2 million at the end of June.IFRS 16 adds GBP 61 million to debt, which as you can see in the reconciliation table top right is down GBP 3.1 million compared to December '22. This reflects the net impact of branch and other release renewals of GBP 4.7 million less cash payments on leases of GBP 7.8 million, which were accounted for within net cash from operating activities on the left of the chart. Overall, this leaves us with good liquidity and significant headroom on our facility thereby providing security, flexibility and options for the future. Finally, on this slide, we were pleased to extend our GBP 75 million sustainable RCF for a further year in May. The terms and pricing of the facility remain otherwise unchanged and it now matures in 2027. To sum up on Page 14. Our financial results in the short term have been significantly impacted by a continued deterioration in market conditions.Against the strong comparative, sales volume for the first half was down 6% and as expected, adjusted profit before tax was down 62% reflecting lower sales volume, margin pressure in the branches and recycling feedstock prices higher than last year. In response we've acted on costs securing annualized savings of approximately GBP 9 million, of which GBP 7 million will be realized this year, and focused on efficient stock management and cash flow driving net cash generated from operations up 15% on the first half of last year without compromising customer service or our ability to grow. Our operating facilities are well invested with good levels of available capacity, our debt is low and we have good liquidity on our recently financed bank facility. We therefore believe the business is well positioned to benefit when markets return. Finally, to the right of this slide is a summary for 2023 technical financial guidance that I provided which I hope is helpful.With that, back to Darren to sum up and cover the outlook.

[Darren Waters, executive]

Thank you, Michael. On a positive note, we have seen some easing of input costs in Q2, which has continued into Q3 and this coupled with disciplined price management has helped us to rebuild margins to a more sustainable level and this will help us to deliver an improved profit performance in H2. However, since our July trading update, the market has deteriorated further and with interest rates predicted to move higher still, there is a real risk that we won't see the normal seasonal bounce in autumn sales. We are therefore reducing our full year forecast to reflect the market conditions that we're now seeing. That said, we still believe the fundamentals that drive our business remain strong. Firstly, demand for new housing has not gone away. It's just a matter of affordability, particularly for first-time buyers. Second, higher energy costs provide an incentive to homeowners to invest in improving their homes to make them more thermally efficient, which should lead to an increase in demand for triple blazing products such as our Modus profile system.And finally, the appetite for outdoor living and connecting that seamlessly to the home continues to grow and we are well placed to satisfy that demand with our range of garden rooms, decking and fencing products and now extensions, which incorporate our range of patio doors. Furthermore, the closure of Duraflex removed capacity from a market that was oversupplied and that will create growth opportunities as end markets begin to recover. Looking further ahead, we are midway through a review of our business strategy, which has already identified several organic growth initiatives as well as opportunities to capture further cost savings through better procurement, footprint rationalization and other efficiencies. These initiatives will take time to deliver, but this gives me confidence that we can not only weather the market downturn, but emerge far stronger when markets recover.That concludes our presentation and we look forward to answering any questions that you may have.

[Operator]

[Operator Instructions] Thank you. I don't see any questions in queue. [Operator Instructions]

[Clyde Lewis, analyst]

I'm in the room. So Clyde Lewis of Peel Hunt and I've got 3 questions I think for now for you, guys. Post all the cost cuts, where would you be in terms of fixed versus variable costs? That would be useful probably to understand how that differs between Profiles and Building Plastics. Maybe I'll do them 1 at a time. Warehouse performance, would you sort of give an update as to how that's going. What sort of service levels? How that's benefiting your position in the marketplace? And I suppose the third one was really going back to the slide where you put the manufacturing capacity, I think it's Slide 11 when you talk about extruders capacity at year end and obviously its production. There's obviously now a sizable gap between new capacity and new production. Are we supposed to understand maybe market volumes over that sort of period to understand that. But your 71,000 tonnes against the 50,000 tonnes, obviously that's quite a big delta. What could you do there? Because it will be a while before the market bounces 40% I suspect, but I could be wrong, but that's going to have -- you're going to have a lot of spare capacities.

[Darren Waters, executive]

Look, let me answer the warehouse question while Michael is working out his split of fixed and variable cost. But warehouse performance, look, OTIF performance, as I said, is kind of sector leading at 97%. If you take any 1 day, our overdue orders typically range between GBP 20,000 and GBP 40,000 so it's next to nothing. So I think our reputation for service is kind of second to none. So that's going really, really well. And anybody that visits the new warehouse is just kind of blown away by the scale and the efficiency, the kind of order that you see when you walk around the place. In terms of the manufacturing kind of capacity that we've got and we do have latent capacity, I think I would hold that question until we talk later in the year about our strategy moving forward because I think we do see opportunities to fill some of that by making better use of our trade counter network. So Clyde, I'd ask you to hold that question, remember it and ask me again in 6 months' time. Michael, I don't know if you can address the cost issue.

[Michael Scott, executive]

Yes. So if you look at our cost base in total, let's call it about GBP 150 million of overhead including depreciation. The split of that is 60% labor, 20% property and depreciation, 10% distribution and 10% the rest. This is a largely fixed cost base. There's an element of variability in labor, which is how we manage seasonality in variable compensation and an element of variability in distribution around volume. If we think of the cost reduction program, the GBP 9 million of savings that we have captured are almost all labor related. So GBP 9 million coming out of GBP 150 million cost base related to labor will reduce that 60% split of overheads quite considerably. But the variable aspect of labor is not huge in our business now.We're managing a little bit of short-term seasonality with variable labor in peaks and then you have variable compensation based on business performance. Again distribution, a little bit variable. But quite frankly the vast majority of the cost base is fixed, which is why we have to take such significant action on it in order to support the business given the level of volumes that we're seeing. What I would say though is that when volumes increase, we think based on the investments that we've made in manufacturing capacity, in warehousing capacity and in recycling, which now includes a lot more automation than was previously the case. Costs are going to go back up when volumes increase and that's why I think the operational gearing point working both ways is a very important one to make now.

[Operator]

There are webcast questions from Robert Chantry. There are 3 questions. Would you like them to be read 1 at a time or all at once?

[Darren Waters, executive]

I think we can see them. Laura, we can see those.

[Michael Scott, executive]

We can see them so we'll take them 1 at a time and we'll answer them then.

[Darren Waters, executive]

Yes. So I'll take the first one around the branch strategic review. I think what I would say that these early conclusions would be that look, we believe that we can sell more through our existing network. Right now we've got 214 branches roughly turning over about GBP 1 million each and there's a range there because obviously some are not yet at maturity, but the hypothesis is that we believe we can sell more, particularly by focusing on bigger ticket items such as windows and doors. We're just about to launch a new aluminum lantern, which we think is going to be a game changer, and again that will provide an opportunity along with Garden Rooms and other products that we sell through the network. So those are the early conclusions. But again when we come to talk about strategy when we've completed our review, we'll be a lot more granular around the detail of that and what that means in terms of revenue at the time. Michael, do you want to pick up the volume.

[Michael Scott, executive]

So the next question is a little bit on the shape of volume run rate through June, July, August and then the exit rate. So Darren mentioned that we've reduced our outlook for the rest of this year and if you look at the notes published by Berenberg and Peel Hunt this morning, you'll see that reflected in their most recent update. As Darren said in the commentary, what we've seen in very late July but absolutely through August is daily sales run rate that introduce to us a significant risk that we will not see our normal seasonal update through the autumn season. Now to give that sense of scale, ordinarily what we'd expect to see is that the second half run rates per day are probably 5% up on first half run rate per day if you look at seasonality on average over the last 10 years. And what we're seeing at the moment is significantly below that. The assumption that we've made for the rest of this year is that run rates through the year to go stay flat with what we've seen in July and August.We think that's a conservative assumption, it will still represent a seasonal step-up of 2% versus the first half and it will represent in volume terms overall sales down 4% on 2022 for the second half compared to 2% down in the first half. I've got to say that July was in line with that. But remember July last year, we suffered from the cyber attack. So actually July, August was a little bit weaker than that minus 4% that we're assuming for the second half. But we know we've got new business coming online through the second half of this year that closes that gap. So in summary, kind of where I expect sales to be through second half is 4% down, which would give us 3% down across the full year after recording 2 stepdowns in the first half. So hopefully, that gives you the basis on which we've set the outlook for the rest of the year, but it is all about not seeing that seasonal update to the extent that we would ordinarily expect to see it.

[Darren Waters, executive]

And the third one from Rob in terms of negotiations with recycler providers. Yes, I mean those kind of conversations are ongoing, Rob. Like I said, already secured 80 contracts and those contracts range from between 6 months and 2 years at prices that are a lot more realistic. This is part of our strategy moving forward. So yes, we would hope that that combined with a normalization of in-feed prices will see an improved position for us.And then there's a question here from [ James Louvin ]. Duraflex and the potential volume uplift that that could deliver in 2024. I think, James, to be fair it's still very early days in that process. Like I said in little under 3 weeks' time, the factory kind of shut its doors and Veka take over supply and it's going to be really interesting to see how that transitions. I don't think we've yet seen the full kind of fallout from that event. We're well placed to take advantage of any supply disruption should that occur. We've already secured Polyframe and look, if other fabricators want to make the switch, they're ready. But I don't want to be drawn to a number now because I think let's see what happens from the end of this month going into October is what I would say there.And then another 1 from James. When should we expect the results of the strategic review? I think that will be towards the end of the year. We will present our completed strategy to the Board in early November and assuming that's endorsed, we'll be looking to socialize that with investors shortly after. And then resulting costs.

[Michael Scott, executive]

Just 1 James' question. Recycling cost-up is important. Can you go into more detail on how you expect this to play through? Are we at a new higher level for the next 2 to 3 years or can we expect it to fall?I think, James, as we always said, we expect this price to fall. And in the past whilst there is not perfect correlation by any stretch between virgin resin or virgin compound and the cost of windows, they are reasonably highly correlated in terms of sense of direction, orders of magnitude and typically timing. And what we're seeing now is we're seeing is a lag in the reduction in in-feed prices versus the reduction in virgin resin costs. Now again to give that sense of scale, for us we've always said that the economics of recycling for us are about the difference between the production cost of recycled compound and the price you pay for virgin compound. If I look back taking the last couple of years out of the equation, through the cycle that delta has been between GBP 250 and GBP 450 per tonne in favor of recycling and that's typically been an economic benefit to Eurocell of between GBP 2 million and GBP 4 million per annum.We saw a huge benefit then in 2021 and 2022 when that delta increased to an average GBP 600 per tonne and that was in effect the virgin resin price shifting up and recycled feedstock prices initially staying the same in '21; but about this time last year shot up considerably and have stayed there. So in '21, we saw an increasing delta and in '22, a decreasing delta; same average number for the year. But the decreasing delta in '22 was the one that gave us cause for concern and it is that recycler price that has stayed up over GBP 400 a tonne versus historically something like GBP 200 per tonne. That's driven this economic spurt. But it is starting to change. We've seen the signs that it is beginning to ease and the actions that we're taking to open up new areas of supply, to remove the aggregators from the market and to look at the efficiency and cost of production of our own recycling plant will all serve in my view to take this delta back into the GBP 250 to GBP 450 range that it has been historically as opposed to the GBP 150 per tonne that we're seeing in the first half of this year.So that I think covers the questions that we're seeing on the portal at the moment. Operator, are there any more questions on the line?

[Operator]

Yes. We do have 1 question from the audio. We've got from Shane at Goodbody.

[Shane Carberry, analyst]

Just 2 short follow-ups over in May. The first is just on the capacity in the U.K. and obviously you mentioned Duraflex coming out of the market. Can you just give us a little bit more color on where does that leave us from a kind of competitive backdrop perspective and where are we in terms of capacity now? And then the second one is just kind of a follow-up I suppose on the kind of branch network review. Again apologies for coming on that subject again. But Darren, you mentioned about the kind of maturity profile kind of about GBP 1 million in terms of annualized revenue for a mature branch. Is there any kind of branches that you look at that you have that are maybe turning out 20%, 30%, 40% more than that and that's the sort of where you expect things to get to from a kind of size and shape perspective as you say or is it kind of a new reform as such kind of store altogether that you think you'll need to increase from that GBP 1 million materially more?

[Darren Waters, executive]

Okay. Taking the first question I think in terms of the U.K. market. Look, being frank, there are no reliable statistics today that kind of size the total PVC extrusion market in the U.K. or in other words also break that down by supplier. Having said that, about a year ago [ Linear ] took over the supply and sales and took that business away from Duraflex. So I think Linear are kind of moving more into a balanced situation. Obviously now the same with Veka having taken over supply into both Duraflex and also some of their fabricators -- sorry, into U.K. Window & Doors Group and their fabrication so to handle those Duraflex fabricators that were sourcing from Tewkesbury. So I think what I want to say is the market is becoming a lot more balanced and I suspect overall there is still excess capacity particularly in the current market having seen the declines that we've seen this year, but it's definitely better. That's what I would say on that.In terms of the branch network, look, again as I've already said, we see an opportunity to sell more bigger ticket items; that's doors, windows and roofs through the network and by having greater focus on those opportunities. That's something we're going to do. So the plan is to increase the average sales per branch as we move forward, but I don't want to be drawn on a target number because we've not yet completed that work. But yes, that's the plan. And also I think as part of that work, we're a lot clearer on the format that works in terms of size of branch. We've also probably still got some gaps in the network that we'd like to plug. Probably now is not the right time given the state of the market, but that's something we're interested in doing as we move forward.

[Operator]

We have no further questions in the queue. [Operator Instructions]

[Michael Scott, executive]

We've got a couple more in the room I think.

[Clyde Lewis, analyst]

That's me again. It'd be really useful to get your latest thoughts around [indiscernible] the virgin resin market as opposed to the recycle market and where you are on forward purchases at the moment on that? Would be useful to get that. And the second one was going back to the extra branch competition that you see. Again it would be useful to give a little bit more detail around how that's evolving, what's playing out there in terms of sort of the day-to-day out in the field?

[Darren Waters, executive]

Okay. So I think in terms of resin, prices have kind of consistently been falling. Having said that, we've just seen literally hot off the press the first increase in 15 months I think driven by ethylene prices, which are one of the drivers behind resin. We've maintained our surcharge because we always felt that there was some uncertainty around resin going into Q4 and that's clearly proven to be the case based on what we've seen today. I don't think we're going to see the levels that we were at probably a year ago when I think it peaked at around about GBP 1,600 a tonne. So we're now down at near to GBP 1,000, but who knows. But I think all I would say is that our current pricing is reflecting that level in terms of virgin resin and also DMP prices that we're now seeing.

[Clyde Lewis, analyst]

[Technical Difficulty]

[Darren Waters, executive]

It actually is an increase nonetheless after a number of consistent falls over the last 15 months.

[Michael Scott, executive]

In terms of forward purchasing, we've looked at whether forward hedging can be economic in the past and the premium that the resin providers have wanted in order to do that has just made it economic. I think in 6 years we've been able to put 1 sensible forward deal in place. But what we do do is manage across [indiscernible] is our key supplier, but we do keep them honest with other suppliers including importing resin from time to time.

[Clyde Lewis, analyst]

I mean on the imported resin, is much coming in from the U.S. and the Gulf what was historically has been a little bit of a balance in fact.

[Darren Waters, executive]

Is probably, I don't know, 10% of the market, 9% of it is coming from within Europe. And then in terms of the branch activity, what I would say there is that one of the suppliers in the market with a small number of branches has always historically focused on the new build market. Obviously the new build market is contracted, they've turned their attention to the RMI market which is where we typically play. And therefore, what we've seen is kind of regional stats of aggressive pricing, which we have to respond to because we want to maintain share. It's had a fairly positive impact on margins. But as we said, there's been some margin leakage. But it's very localized. It's not spread across the U.K. network.

[Clyde Lewis, analyst]

Coming back on the other question around branches. Give us an idea as to what you would say is being kicked in in terms of the most big ticket item...

[Darren Waters, executive]

A big ticket item would be a lantern roof, which could sell between GBP 800 and GBP 1,000; a set of window frames for a house, a few thousand pounds; door, GBP 600 to GBP 700.

[Clyde Lewis, analyst]

But as a split of revenue, would it be sort of 10 large big items, 90 smaller stuff or bit more...?

[Darren Waters, executive]

Well look, like I said if I answer that question, I'm going to end up telling you where I think we can get to in terms of revenue per branch and I don't want to do that right now. So I'm not going to answer that, but it's a big number potentially.

[Michael Scott, executive]

Okay. I think we've got some more on the console.

[Darren Waters, executive]

A question from James on dividend cut. What was the discussion around that? What is the clear policy going forward as we get recovery forming?

[Michael Scott, executive]

So on dividend, the interim dividend is calculated based on our expected PBT for the year with the dividend set at the equivalent DPS at 2x cover of anticipated earnings with 1/3 paid at the interim and that is consistent with the policy that we've had since emerging from COVID when dividends were reinstated. We think and the Board felt that that is appropriate in the current circumstances, recognizing the environment and we can of course and will take a view on the full year dividend based on how we perform in the second half of the year. I think it's also important to recognize the review of strategy that is ongoing at the moment, which will ultimately determine the capital requirements of the business over the course of the next strategic horizon so 3 to 5 years and we will be thinking of capital allocation policy or include capital allocation policy as part of that review strategy which, as Darren said, will conclude towards the end of this year. We'd be looking probably to communicate conclusions I think with our full year results, but then probably a deeper dive with some form of Capital Markets Day shortly after that would be I think our route to communication on this.

[Darren Waters, executive]

Another question from James, which is referring to the 2025 housing regulation changes, which is around the Future Homes Standard. So on that, James, the Future Homes Standard hasn't been published as yet. But we expect from the conversations that we've been having that new values for windows will drop from 1.4%, which is where they are currently, to 0.8%. The only way that that can be achieved is by moving to triple glazing and we already have a proven solution, which is our Modus window profile, which has been in place for 10 years, but I think now is about to come into its own. And in fact one of the major house builders has already specified Modus to go in every one of the homes that they're now going to build. So look, Future Homes Standard not yet been published. But when it does get published, which we think will be sometime during 2024, we are well positioned to take advantage of that. And is it a game changer for Eurocell? No, but I think what it does with Modus, it just simply strengthens our position in that market where we're already market leader.

[Michael Scott, executive]

Operator, do we have any more questions on the line?

[Operator]

There are no further questions in queue for audio as well. I'm handing it back to Darren for closing remarks. Thank you.

[Darren Waters, executive]

Thank you, Laura. Well, again, thanks for everyone who attended this morning's presentation. And I'm sure we'll be having conversations with some of you over the course of the week and look forward to catching up then. But until then, thanks for now.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Continue to stay safe. You may now disconnect.